1. Fields of the Invention
The present invention relates to methods and systems for the provision and maintenance of risk-protected retirement income using self-funding risk-control techniques.
2. Description of Related Art
Defined-benefit pension plans involve the delivery of recurrent retirement income to participants according to formulas contained in the governing plan documents. Income amounts are typically based on years of employment service and the participants' compensation in years prior to retirement. The plan sponsor operating a defined-benefit plan assumes a variety of risks involved with assuring that promised retirement income payments can actually be made. These risks may include those related to funding sufficiency, uncertain investment returns of plan assets, and realized participant mortality experience vs. mortality rate assumptions. While stringent regulations apply to the operation of a defined-benefit plan, many companies have found the risks and costs associated with such plans to be burdensome, making them less common today.
A defined-contribution pension plan, such as that enabled by §401(k) of United States Internal Revenue Code, involves the recurrent contribution of deposits into investment funds that grow until retirement, when withdrawals are contemplated. While the plan sponsor may also contribute to the fund, no specified retirement income amounts are promised. Plan participants therefore bear the funding, investment and longevity risk (chance of outliving one's assets) involved with such a defined-contribution plan. The performance of defined-contribution plans has been unsteady due to market volatility, causing particular difficulty for participants near or in their early retirement years.
A number of attempts have been made to remediate the risks that a defined-contribution plan participant bears. One attempt involves the participant's purchase with plan proceeds of an insurance company annuity contract that promises fixed payments over the participant's lifetime. However, annuity contracts significantly restrict participant access to funds, reduce assets available to beneficiaries and may not provide retirement income of a sufficient amount. Another attempted solution involves the introduction of guarantees in the form of guaranteed minimum withdrawal and income benefits that provide for lifetime income. A common guaranteed minimum withdrawal benefit (GMWB) allows the fund holder starting at a certain age to withdraw a fixed percentage (typically around 5%) of a guaranteed income base every year (the guaranteed income amount). A common guaranteed income base is a fixed percentage of the highest anniversary value of a balanced or target-date retirement fund held inside the participant's account. If fund assets become depleted after first taking withdrawals from the fund, the insurer promises to make the fixed payments for the remainder of the participant's lifetime. This benefit is provided to the participants in the faint of an insurance (annuity) contract. These contracts provided by insurance companies subject participants to the claim-payment abilities of the insurance company, a third party guarantor. The ability of guarantors to stand behind such guarantees over the full life expectancies of participants is unknown and plan fiduciaries are reluctant to subject all or a significant portion of their plan participants to the claim-payment risk of one or more third party guarantors.
FIG. 1 is a schematic illustrating aspects of prior art, most notably the use of third-party guarantors to provide guarantees for retirement income amounts. As shown, Retirement Plan Participants contribute to a fund that is invested in assets that provide for the return of Contributions along with Investment Returns. The fund pays an Annual Guarantee Fee to the Insurer or Third-Party Guarantor. (The Guarantor in turn may hedge its guarantee liability through transactions with Derivatives Dealers.) If the Fund's assets are insufficient to meet the guaranteed retirement income amount, the Guarantor makes the required payments after the Fund's assets are depleted.
Thus, there is a need in the art for a method and system for the creation and/or maintenance of an improved retirement income plan.